bank of albania · 2019. 7. 4. · bank of albania 2 2018 annual supervision report data from this...

1 Bank of Albania

Annual Supervision Report 2018

Bank of Albania

2018A n n u A lSuperviSion

report

2Bank of Albania

Annual Supervision Report2018

Data from this publication may be used, provided the source is acknowledged.published by: Bank of AlbaniaSheshi “Skënderbej”, nr.1, tirana, Albaniatel.: + 355 4 2419301/2/3; + 355 4 2419401/2/3Fax: + 355 4 2419408e-mail: [email protected]

printed in: 240 copiesprinted by: ADel Co

www.bankofalbania.org

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c o n t e n t s

1. THE FUNCTION OF SUPERVISION 7

2. KEY DEVELOPMENTS AND PRIORITIES 82.1 On-site examinations 122.2 Priorities planned for 2019 13

3. REGULATORY FRAMEWORK 16

4. LICENSING 214.1 Banks 214.2 Non-bank financial institutions, microcredit financial institutions and electronic money institutions 224.3 Foreign Exchange Bureaus 234.4 Other 23

5. RISKS IN THE BANKING SYSTEM AND NON-BANK FINANCIAL INSTITUTIONS 265.1 Banking system highlights 265.2 Capital ownership structure by country of origin 275.3 Banking system structure 275.4 Management of banking activity risks 305.5 Non-bank financial institutions and savings and loan associations 485.6 Credit Registry 53

ANNEXES 551. Organisational Structure of the Supervision Department 552. Specific share of each bank in the banking system 553. Assets and liabilities 564. Key financial indicators 605. Banks’ shareholders 616. Data for the shareholders/partners of NBFIs 627. Bank branches and agencies in Albania by region 648. E-Banking products/services, by commercial banks, as at end of 2018 649. List of entities licensed by the Bank of Albania by year 6510. Data on banking services up to 2018 6511. Banks network as at the end of 2018 6512. Supervision regulations in force, as at 31 December 2018 66

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b o x e s

Box 1 Changes to the regulation “On consumer credit and mortgage credit” 17Box 2 Evaluation by the MONEYVAL committee 42

T a b l e s

2. KEY DEVELOPMENTS AND PRIORITIESTable 1 Number of examinations by year of institution and topic 12

4. LICENSINGTable 2 Number of NBFIs’ agents and number of e-money institutions as at end-2018 25

5. RISKS IN THE BANKING SYSTEM AND NON-BANK FINANCIAL INSTITUTIONSTable 3 Banking system total assets and loan portfolio’s share in GDP 28Table 4 Key banking system asset items 28Table 5 Key banking system liability items 29Table 6 Change in off-balance sheet items compared to the previous year 29Table 7 Herfindahl* (H) Index of asset, deposit and loan concentration 30Table 8 Quarterly credit growth in 2018 30Table 9 Credit by sector and purpose of use 31Table 10 Structure of outstanding credit by term to maturity 32Table 11 Structure of outstanding credit by currency 32Table 12 Credit by branches of economy 33Table 13 Share of outstanding credit by category 34Table 14 Type of collateral by sector and currency 36Table 15 Main profitability indicators 45Table 16 Profitability indicators from the main activity 45Table 17 Average profitability ratios 46Table 18 Performance of efficiency ratio 46Table 19 Shareholders’ equity structure and its components 47Table 20 Activities allowed to non-bank financial institutions 48Table 21 Total assets of NBFIs, December 2017 - December 2018 49Table 22 Total NBFIs’ credit portfolio, net and gross 49Table 23 Gross credit portfolio by NBFIs’ activities 50Table 24 Financial leasing portfolio by financed object 50Table 25 Annual factoring volumes and balance 50Table 26 Indicator of credit portfolio quality 51Table 27 Volume of transfers and payments on annual basis 51Table 28 Unions and SLAs assets 52Table 29 Gross and net loan portfolio, SLAs and unions 52Table 30 List of entities that report to the Credit Registry 53

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C h a r T s

4. LICENSINGChart 1 Financial and banking sector structure and ownership 21Chart 2 Number of bank branches/agencies, over years 24Chart 3 Resident population and bank branches/agencies’ network, by region in 2018 24Chart 4 Foreign exchange bureaus, over the years 24

5. RISKS IN THE BANKING SYSTEM AND NON-BANK FINANCIAL INSTITUTIONSChart 5 Equity ownership structure by country of origin and its performance over time 27Chart 6 Monthly credit growth in 2017 30Chart 7 Outstanding credit to enterprises and households as a percentage of total credit 31Chart 8 Volume of outstanding credit by currency 32Chart 9 Share of unhedged foreign currency loans, against the exchange rate risk, in total foreign currency loans 32Chart 10 Non-performing loans compared to the previous quarter 33Chart 11 Outstanding NPLs in the banking system 34Chart 12 Loan loss provisions 34Chart 13 Net non-performing loans to regulatory capital 35Chart 14 Outstanding credit to enterprises and households 35Chart 15 Outstanding non-performing loans by currency 35Chart 16 Quarterly unhedged foreign currency NPLs against the exchange rate risk to total foreign currency outstanding credit unhedged against the exchange rate risk 35Chart 17 Number of complaints processed over the years 44Chart 18 Share of complaints by category 44Chart 19 Share of complaints by segment of advertised products 44Chart 20 Share of complaints by typology 44Chart 21 Shareholder’s equity 46Chart 22 Capital Adequacy Ratio and its components 47

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1. tHe FUnctIon oF sUPeRVIsIon

the main objective of the Function of Supervision is early identification of risks along with evaluation of internal control and the efficiency of corporate governance. risks which can be identified in this process include credit risk, liquidity risk, operational risk, interest rate risk, capital profitability risk, reputational risk and money laundering. internal control and efficient corporate governance are important risk-mitigating factors in the activity of banks, non-bank financial institutions, and other institutions licensed by the Bank of Albania. other steps towards successfully meeting the ultimate goal - preserving the soundness of financial institutions - include timely action and effective regulatory measures, which can be provided through continuous supervision, and through evaluation of banking supervision.

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The signing of the memorandum of understanding between the Bank of Albania and the European Central Bank (ECB) on banking supervision, deemed as a pivotal development among our priorities, attaches importance to the Bank of Albania establishing a more structured and formalized cooperative relationship with the most important institution of the european union (eu). it sets out the modalities of bilateral cooperation between the two institutions, providing for exchanging information and conducting effective supervision.

in the framework of cooperation with counterpart authorities, we have participated in three supervisory colleges organized for the european-based banking groups that also operate in Albania. even though Albania participates as an observer in the college, assessments of the activity of subsidiaries in Albania have been considered and submitted in the framework of risk management at group level. in 2018, there was also a regular flow of information related to assessment of the group recovery plan as well as the determination of capital requirements. in the framework of the coordination of supervisory activities, this year, a joint (targeted) examination was conducted with the eCB supervisors in one of the banks, whose group is based in the eu.

Due to consolidation of the structure of participants, structural developments and ownership changes took place in the banking system in 2018. this brought the number of banks to 14 and potentially to 12 with the absorption of one bank already in the process of finalization and the voluntary liquidation of another bank. these trends will be closely monitored in the period ahead. in this context, the following events have occurred or are in process:

• the merger by absorption of two banks in the system. the process was dictated by developments in the home country, rather than as a need arising in the domestic market. Consequently, the intesa Sanpaolo Bank acquired and merged with veneto Bank, after the latter declared bankruptcy and was purchased by intesa Sanpaolo Bank in italy.

• the American Bank of investments acquired and merged with the nBG Bank Albania. this event was sustained by the banking system restructuring plan in Greece to reduce exposure outside Greece, in the framework of the nBG Bank’s restructuring plan, and in line with its commitments to the european Commission.

• union Bank acquired the international Commercial Bank. this event was determined by the decision of its shareholders to leave the Albanian market, but also by the union Bank’s earlier ambition to expand in the domestic market through the absorption of an existing bank.

2. KeY DeVeLoPMents AnD PRIoRItIes

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• tirana Bank, formerly part of the piraeus Group, for the same reasons as the nGB Bank, concluded the sale of its shares to Balfin Group shpk and Banka Commercijalna A.D. Skopje. this transaction was approved by the Supervisory Council of the Bank of Albania in February 2019.

• Societe Generale Albania Bank realized the sale to the Hungarian otp Bank nyrt as part of the parent bank’s strategy to withdraw in general from the Balkan region.

• lastly, the shareholders of the Credit Bank of Albania decided on the voluntary liquidation of the bank, which is expected to be finalized during the first half of 2019.

the aforementioned events are a realization of trends shown in recent years for the consolidation of the banking market. the most significant changes to be expected have already occurred. As a result of these changes, the share of domestic capital has increased, and it is expected to boost banking activity. Supervision will hence be focused on preserving the quality of risk management and financial soundness indicators.

Exposure to credit risk - identified as the most significant risk, based on the volume and share of activity, the impact on a bank’s financial position and the dominant capital requirement declined considerably. the primary ratio, non-performing loans to total loan portfolio, reached 11.08% at the end of 2018, thus approaching the level of similar periods a decade ago. this ratio decreased by 2.15 p.p., as the npls decreased by approximately All 15.2 billion or around 19%, mainly as a result of events related to write-off of npls and other solutions.

Despite continuous reduction of the risk to this category of exposure, as part of its approach to addressing issues in a sustainable and inclusive manner - identified as a supervisory priority for 2018 - the Bank of Albania remains committed to providing best solutions and to realizing all its commitments under the national plan for the reduction of npls. For this purpose, the Bank of Albania prepared a draft-regulation on out-of-court settlements for borrowers, which was discussed in several meetings with banks during the year and in written communication. exchanging opinions and reflecting them in the draft-regulation took some time for all the stakeholders due to the complex nature of establishing a viable and well-coordinated form of cooperation between banks. Meanwhile, important issues regarding credit risk management were discussed during the meetings organized with the banks, such as the use of borrowers’ official financial statements and a study of Deloitte on financial sustainability of the largest enterprises in the country. this study was funded by the World Bank FinSAC project.

the Bank of Albania is part of the discussion process for establishing the Credit Bureau, of which the european Bank for reconstruction and Development and the Albanian Association of Banks are a part. Discussions between the parties

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began in 2016 and in the last year several meetings were held to discuss the main issues regarding models that could be applied for the establishment of this Bureau, its institutional positioning, the governing structure and means of financing. the final stand regarding the issues under discussion is expected to be clarified in 2019.

one of the supervisory novelties, which was presented in the last year’s report as well, was the inclusion, in 2018, of reporting by banks of internal assessment of capital under the framework of an “Internal Capital Adequacy Assessment” document. review and concluding analysis of these reports, including “Recovery Plans”, has been a particular challenge, requiring a relatively long period of time and a comprehensive focus. these two documents represent a complete self-evaluation of bank’s capabilities to control and cope with risk levels that arise during ordinary business, and to recover from a difficult financial situation. Specifically,

• the first assessment of this document evidenced the quantitative effects calculated by banks, compliance with regulatory requirements and some shortcomings of a wider and more qualitative inclusion of risks with potential effects on capital requirements. this assessment showed that the information contained in these documents was not sufficient for the Bank of Albania to agree on a minimum capital adequacy ratio for banks, which is expected to be the end result of this process. the identified issues were presented to banks in the framework of a formalized written communication at the beginning of 2019, which is expected to be ongoing in order to enhance the quality of preparation of this document in the future.

• During 2018, recovery plans have been subject to enhanced regulatory requirements, and assessed through close communication with banks, as well as with the World Bank’s valuable assistance. While the quality of the drafted plans has increased, there are still elements that need to be improved for more complete integration with the internal risk management framework as well as with the strategies and objectives at individual and group level.

In terms of improving supervision processes, a development process as defined in previous reports, we are in the final phase of finalizing two projects assisted by eBrD and WB. Specifically,

• With the assistance of the european Bank for reconstruction and Development (eBrD), an assessment of internal supervision of risk assessment procedures was carried out, mainly of organizational and credit risk. in addition, the relevant regulatory framework was assessed, accompanied by concrete proposals for change. Based on these assessments, a plan for their implementation was drafted, including training for employees of banks and of the Supervision Department.

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• With the assistance of the World Bank and Grant thornton, a draft document for communication and exchange of information and evaluation of external auditors was prepared, to improve the quality of control for both banks and auditors. Defining guidelines and preparing for the implementation of international standards of reporting in the field of banking supervision and reporting is another objective of this project, which remains to be evaluated during 2019.

in the first half of this year, the Committee of experts on the evaluation of Anti-Money laundering Measures and the Financing of terrorism (MoneYvAl) completed the fifth round of evaluation of Money Laundering and the Financing of Terrorism, a process that was launched and has been reported on since 2017. the evaluation, where the Bank of Albania has played a special supporting role as the supervisor of most institutions in the financial market, was concluded in July 2018, with the adoption of the evaluation report in the Moneyval’s plenary session. According to this report, financial institutions were assessed at the “substantial/significant” level of effectiveness, at which banks present a good understanding of the risks of money laundering and financing of terrorism, legal obligations, and generally have taken proper measures proportionate to the estimated risk level for the prevention of money laundering and of the financing of terrorism.

the evaluation process was accompanied by several recommendations and a subsequent plan of measures to address the main issues identified in the report, whose fulfilment will continue throughout 2019. in this context, the Bank of Albania has drafted its own action plan, and is committed to achieving necessary improvements in the regulatory framework and strengthening the effectiveness of the supervisory process by May 2019. Also, co-operation with the General Directorate for the prevention of Money laundering continued intensively during the year. in the framework of Moneyval’s evaluation process this cooperation took the form of joint inspections as well as contributions to reviewing the legal framework on anti-money laundering issues.

in view of fulfilling the priorities set for 2018, the Bank of Albania has drafted the regulatory framework envisaged in accordance with Basel iii and has also carried out the process of equivalence. More detailed information about these elements is provided in the following sections of this document.

lastly, in support of its mission, the Bank of Albania, through the Supervision Department, continued its normal activity of monitoring the financial system, mainly banks. this was done through on-site inspections and off-site analyses, assessing the measure of exposure against individual risks and the control environment for their management as well as reviewing/improving the regulatory framework and licensing of entities and other activities.

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2.1 on-sIte exAMInAtIons

Full-scope and partial examinations were conducted in 7 banks, 10 non-bank financial institutions and 31 foreign exchange bureaus during 2018. the main focus was placed on the examination of banks, which have the main share of financial market activity. Special attention has been paid to banks that are in acquisition/merging processes, or banks with high growth rates. From the above-mentioned, examinations of 5 banks, 7 non-bank financial institutions and 8 foreign exchange bureaus were conducted in cooperation with the General Directorate of the prevention of Money laundering. examination of one bank was conducted jointly with the Financial Supervisory Authority.

Table 1 Number of examinations by year of institution and topic

examined institutions

Stra

tegi

c ri

sk

org

anisa

tiona

l risk

Cre

dit r

isk

liqui

dity

risk

inte

rest

rate

risk

Mar

ket r

isk

iCt

risk

ope

ratio

nal r

isk

repu

tatio

nal r

isk

prof

itabi

lity r

isk

Cap

ital r

isk

2016* 6 7 8 6 7 7 7 7 8 6 82017 9 12 13 10 10 9 11 8 11 10 112018 8 10 9 8 8 8 9 8 48 9 8

* In 2016, 14 joint examinations were carried out with the Deposit Insurance Agency (DIA) in Savings and Loan Associations where the Bank of Albania was present to support the DIA.

the areas in which the examination recommendations were focused during 2018 can be summarized as follows:

• increasing the role of the Steering Council during the drafting of strategic plans (including planning of capital needs), as well as overseeing their implementation;

• ensuring a proper balance between dependent and independent members of the Steering Council;

• Adapting and completing organizational structure in accordance with the pace of activity growth and providing appropriate incentive and reward systems;

• Strengthening internal control systems, increasing work quality and independence of control structures;

• Careful implementation of investment policies by avoiding complex instruments that have no known ratings;

• Diligent treatment of borrower groups, as well as strengthening of eligibility criteria during financial analysis of loans; reclassification of borrowers and creation of additional provisions;

• Deepening analysis related to liquidity risk and interest rate risk;• increasing iCt support, strengthening security programs, regular risk

assessment, revision of business continuity plans, staff increases;• Accurate application of regulatory requirements for calculating capital

indicators;

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• increased attention to AMl measures, application of automated control systems, staff training.

Banks generally reacted in a timely manner to recommendations, taking appropriate measures to ensure compliance at all times with regulatory requirements.

With regard to non-bank financial institutions, the attention of 2018 has been on those institutions that are part of banking groups, in order to comprehensively assess these groups. overall, the results were positive, evidencing a careful management of risks across the group, in line with regulatory restrictions for related parties. the supervisory focus of this year was also on micro-credit and on payment institutions. issues identified during the examinations relate to the re-classification of loan portfolios and respective effects in financial statements, risk management from open foreign exchange positions, improvement of internal governance frameworks, internal control systems. the on-site supervisory process for these entities focused also on assessing the level of transparency with customers. it has been concluded that those institutions with consolidated experience in the market generally provide a higher level of transparency and attention to customer complaints. However, newer institutions, albeit compliant with legal and regulatory requirements, still have room to improve the level of transparency. recommendations have been left at the end of the examinations for any necessary improvements.

the supervisory process also includes monitoring the implementation of recommendations as well as rapid response in case of potential risks or infringement of indicators reported by banks and non-bank financial institutions. in 2018, besides the on-site examinations, we had frequent correspondence and communication with all institutions in response to events or developments that could potentially affect their financial situation. these were coupled with specific supervisory measures and requirements. the Bank of Albania has also been heedful to international developments, notably the crises in turkey; restrictive and preventive measures have been taken for banks with exposures to this country.

2.2 PRIoRItIes PLAnneD FoR 2019

the 2018 developments in bank consolidation changed the landscape of market actors by heralding innovation in banking developments. other changes are expected in the upcoming year in relation to banks’ shareholders. At this phase of the process, attention will be paid to adopting notified changes as well as monitoring and closely supervising them to assess development strategies and their implementation, reviewing risk management strategies and internal processes, in order to ensure compliance with regulatory and supervisory expectations.

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Despite the continuous decline of non-performing loans, this risk remains the main focus of supervision. Measures taken by the Bank of Albania in cooperation with other governmental authorities have provided sufficient impact to mitigate this phenomenon. Banks have also been active in relation to individual solutions for borrowers, yet the current risk level remains high. During the current year, the regulatory framework coming into force for the treatment of common borrowers in financial distress will be added to the supervision of banks’ plan for the reduction of non-performing loans, and the monitoring of risk management processes. this cooperation platform is expected to bring a new unified way to treat borrowers and to improve the effectiveness of solutions.

the Screening Report in the context of the Acquis Communautaire is one of the national developments that involves many institutions. on its basis, the european Commission will assess Albania to determine whether capacities are in place to launch negotiations on the relevant chapters. the Bank of Albania is responsible for some of the chapters and based on the outcome of the report it will review the approximation of regulatory acts related to the activity of credit institutions (banks), and other relevant institutions.

Approximation of the regulatory framework remains a continuous process because of the need and objectives to achieve the best standards and because of constant changes in european reference acts. Approximation with Basel iii will be a novelty of the current year with primary attention being given to regulatory acts related to liquidity indicators, large exposures and the stress tests that banks have to carry out.

Fulfilment of Moneyval Committee recommendations will concern technical aspects (improvement of the legal and regulatory framework), effectiveness related to a number of issues in the field of legal and regulatory framework implementation, and inter-institutional cooperation. in this framework, in pursuance of the national action plan for the implementation of Moneyval’s recommendations, the Bank of Albania’s duties, in addition to those that arise for all institutions that have a specific role under the law, envisage a considerable number of activities dedicated only to on-site assessmenet of the governing framework of financial institutions and their effectiveness. Activities are intended to be carried out primarily in cooperation with the GDpMl by maximizing synergies and effectiveness, but also independently.

The Supervisory Review and Evaluation Process will be reviewed in the light of regulatory changes and, for the first-time, introduction by banks in 2018 of the internal assessment of capital adequacy. this is also one of the most important supervisory references, as defined by the Basel Committee. this year’s work will consist in increasing the quality of their evaluation to give due attention to all risks to which banks are exposed. Meanwhile, recovery plans will be reviewed under a new perspective when they are expected to be prepared by banks based on the capital assessment document. For this process, as well as for those aforementioned, we will rely on the assistance

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of the international Monetary Fund for a full implementation of international practices.

During the year, review of the supervisory manual will be completed by updating it to reflect issues of corporate governance which had been identified in the project supported by the european Bank for reconstruction and Development and with the assistance of Deloitte. these reviews of the risk assessment manual foresee a deeper review of corporate governance issues in banks and consequently their full assessment. likewise, all regulatory acts affected by these changes will be reviewed.

At the end of a project supported by the World Bank and with assistance from Grant thornton, the supervision process will be enriched with an internal document that will methodically guide the communication process between supervisors and auditors. this process creates opportunities for improving and increasing the level of control of banks, including, to a greater extent, external auditors in the function of supervisory interests.

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the drafting and review of the supervisory regulatory framework aims at supplementing and improving it, in order to carry out more effective supervision, in compliance with legal requirements and aims for approximation with latest developments in eu regulatory acts and Basel documents.

Banks or other institutions licensed and supervised by the Bank of Albania played an important role in the process of drafting and reviewing regulatory supervision acts, contributing with their comments and suggestions on these regulatory changes.

During 2018, the Supervision Department also contributed to the working group for the draft-law “on payment services”, in the framework of the Bank of Albania’s efforts to approximate the legal framework of the european Directive on payment Services (pSD2).

Special attention was paid to drafting new regulatory acts or revising existing ones, in the light of the approximation of the regulatory framework with the requirements of Basel iii. this resulted in the production of the draft-regulation “on the liquidity Coverage ratio”, which aims at introducing a new liquidity indicator in the regulatory framework of the Bank of Albania, the draft-guideline “on bank stress tests”, review of the regulation” on regulatory capital of the bank” and drafting of new acts on early interventions, in accordance with the provisions of the law on recovery and resolution in banks.

• Approval of amendments to the regulation “On consumer credit and mortgage credit” (approved by decision no. 27, dated 4.4.2018, of the Supervisory Council of the Bank of Albania)

regulatory changes aimed at further approximation with the requirements of the Directive 2014/17/eu, which regulates consumer and mortgage credit agreements for individuals through increased supervision requirements regarding consumer protection. the following Box presents in greater detail the changes made to this regulation.

• Adoption of amendments to the regulation “On capital adequacy ratio” (approved by decision no. 34, dated 2.5.2018, of the Supervisory Council of the Bank of Albania)

Amendments to this regulation consisted in the repeal of one of the counter-cyclical measures imposed on banks in 2013, which established additional

3. ReGULAtoRY FRAMeWoRK

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capital requirements, in the case of increased net investment by banks, in non-resident financial institutions.

BOX 1 CHANGES TO THE REGULATION “ON CONSUMER CREDIT AND MORTGAGE CREDIT”

The Bank of Albania approved amendments to the regulation “On Consumer Credit and Mortgage Credit”, by the Supervisory Council’s Decision No 27, dated 4.4.2018.

The amendments to this Regulation were aimed at further approximation with the requirements of the Directive 2014/17 / EU (On credit agreements relating to residential immovable property), which regulates consumer credit and mortgage credit agreements for households, whilst ensuring a high level of consumer protection, and driven by the Bank of Albania’s initiative to reduce the level of euroization in the Albanian financial system.

More concretely, the main amendments to the regulation “On consumer credit and mortgage credit” consist of:

a) The introduction of the definition of: “bundling practice” and “tying practice”, as well as the stipulation for prohibiting tying practices such as those practices that are not in their interest and for allowing bundling practices that can be beneficial to consumers in terms of providing products/services that are less costly and that facilitate or ensure the credit repayment process;

b) Provision of the requirement that the reference indicator used by the bank when calculating the variable interest rate should be clear, usable, objective and verifiable in each case by the parties to the credit agreement;

c) the addition of some requirements for inclusion in pre-contractual information and loan contracts:

i. The right of the consumer to replace used collateral, with another collateral, as well as articulation of the requirements to be met in order to be entitled to this right. This right that is now offered to the customer provides more flexibility for him by allowing different collaterals for the bank during the lifetime of the loan, conditional to the fulfilment of terms previously set by the bank in the credit agreement;

ii. Provision by the bank of options (if available) for the mitigation of exchange rate risk, to which the consumer is exposed, when the currency of the loan is different from the currency in which the consumer generates his income.

d) Providing the consumer’s right to demand conversion of the credit in the currency in which he generates his income, and this conversion can only be realized based on the bank’s analysis or evaluations, as well as on the bank’s obligation to notify the consumer if, as a result of the exchange rate change, the loan instalment equivalent increases by more than 20% from the value that would result if it was to use the exchange rate of the date of signing the contract and the consumer’s right to convert the loan in the currency in which he generates his income; the addition of these provisions to the regulation aims to increase transparency and enhance consumer protection, particularly

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in cases where significant fluctuations of exchange rate occur, which would lead to an increase of the consumer’s exposure to the bank, expressed in terms of the local currency.

e) an increase in the demand for the bank to provide an illustrative example for the consumer as part of the pre-contractual information, when the consumer applies for loans in a currency that is different from his income currency, aiming for his awareness regarding exchange rate risk that accompanies such a loan and of the effect of exchange rate fluctuations in the amount of instalments payable by the consumer.

During 2018, several new regulatory acts were drafted and considered important for banking supervision and for banks. other regulations that are expected to be adopted in 2019 were also partly revised. in more detail, the following regulatory acts were drafted and/or revised:

• Drafting of the new draft regulation “on liquidity coverage ratio”, in the framework of further approximation of Bank of Albania’s requirements with the requirements of the Basel Committee and european regulations on liquidity risk management and fulfilment of strategic objectives of the Department of Supervision for the implementation of Basel iii requirements. the liquidity coverage ratio (lCr), presented in the new draft-regulation, is a dynamic indicator that measures the bank’s short-term liquidity over a 30-day forecasted time-horizon in liquidity stress situations. in order to be able to calculate the lCr, liquid assets ought to meet strict criteria, before they get qualified to be included in the banks’ liquidity reserve, as well as calibrated rates for liquidity inflows or outflows, based on the european experience during the global financial crisis. the drafting of this regulatory act has also considered the important contribution of the banking system through the transmission of information and data in support of the study / analysis of the impact for this indicator, as well as through the comments and suggestions, or through discussions with banks representatives during the meetings held by the Bank of Albania.

• preparation of some draft-amendments to the regulation “on bank regulatory capital” aimed at approximating Bank of Albania’s regulatory requirements for capital ratios, proportionally with Basel iii requirements.

• preparing the draft-guideline “on Bank’s Stress tests”, which provides requirements and methodologies for conducting stress tests by banks as an important tool of the risk management process in general and specifically, the internal Capital Adequacy Assessment process, in order to unify the practices that banks need to pursue for carrying out stress tests.

in addition, following the completion of sub-legal acts for early intervention pursuant to the law on recovery and resolution in banks, the following drafts of regulatory acts were finalized, in consultation with experts from the World Bank (FinSAC project):

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• draft-regulation “on determining the conditions for granting prior approval to the financial support agreement within the banking group”, which sets out the requirements of the supervisory authority related to the conditions for granting prior approval to the agreement on financial support within the banking group and requirements for documentation and its content, in order for the offering bank to obtain BoA’s approval;

• draft-regulation “on determining the conditions when the early intervention

measures are used and the conditions and the way of performing temporary administration”, which sets out conditions for when early intervention measures by the supervisory authority are to be applied and the conditions and modalities of temporary administration of banks;

• draft-amendments to the regulation applicable to the bridge bank, in order to ensure consistency with the requirements of this law.

in the framework of the Bank of Albania’s initiative to increase the use of the national currency and to reduce the use of foreign currencies (de-euroization) in the Albanian financial system, two amendments were approved in the supervisory regulations in 2018.

• Approval of amendments to the regulation “On Liquidity Risk Management” (approved by Decision no. 14, dated 7.2.2018, of the Supervisory Council of the Bank of Albania)

Amendments to this regulation consisted of an increase in the minimum required level (from 15% to 20%), for the liquidity indicator measured through the ratio of liquid assets to short-term liabilities of foreign currency, in order to deter the use of foreign currencies. the minimum level of this indicator remains unchanged, for the national currency, at 15% and for the total, at the minimum of 20%.

• Approval of amendments to the regulation “On the transparency for banking and financial products and services” (approved by Decision no. 15, dated 7.2.2018 of the Supervisory Council of the Bank of Albania)

the amendments consisted of the addition of regulatory requirements for banks to provide alternative and comparable loans in the currency of their income, to consumers who apply for loans in a currency different to the currency of their income, in cases when banks deem clients’ capacities as insufficient to hedge against exchange rate risk. Also, a requirement has been added to the regulation for cases when it is the first time that banks are granting or restructuring a loan - they should provide an illustrative example to the borrower to raise their awareness regarding the risk that accompanies lending in foreign currency, especially in cases when his income is in the national currency and in the future there may be adverse exchange rate fluctuations and/or interest rate rises, as a result of the increase of a reference indicator.

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Finally, the self-assessment of the Bank of Albania’s regulatory framework pertaining to supervision vis-à-vis the CrD directive1 and the european regulation on capital requirements Crr2 for the activity of credit institutions were finalized. it was done in analogy to the “Assessment of the equivalence with the european regulatory and supervisory requirements framework”, carried out by the european Commission (eC) based on the questionnaire of the european Banking Authority (eBA). the self-assessment of the Supervision Department, as determined by the purpose of the process itself, aims to identify “gaps” in the regulatory framework of supervision, compared to the eu framework, and to draft a mid-term and long-term plan for drafting and reviewing legal and regulatory acts, which regulate banking activity in order to ensure compliance with the Acquis Communautaire. the Bank of Albania’s self-assessment showed that regulatory acts in force comply to a large extent with the CrD and the Crr. the self-assessment was accompanied by a mid-term roadmap of plans for approximation of the Bank of Albania’s regulatory and supervisory framework with the eu regulatory framework.

1 Capital Requirements Directive.2 Capital Requirements Regulation.

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As at the end of 2018, the structure of the banking and financial system in Albania consisted of 14 banks, 30 non-bank financial institutions (nBFis), 463 foreign exchange bureaus, 13 Savings and loan Associations (SlAs) and 1 union of SlAs.

pursuant to the law “on banks in the republic of Albania”, the Bank of Albania is vested with the power to licence and supervise banks, nBFis, savings and loans associations and their unions, foreign exchange bureaus and representative offices of foreign banks.

4.1 BAnKs

in 2018, within the scope of the licensing function, the Bank of Albania made the following decisions:

• approval of the transfer of 100% ownership of the shares of the nBG Bank Albania sh.a., to the American Bank of investments sh.a.;

• approval of legal re-organisation for the merger by absorption of nBG Bank Albania sh.a. (the absorbed company) by the American Bank of

4. LIcensInG

BANKING AND FINANCIAL SYSTEM

Chart 1 Financial and banking sector structure and ownership

Source: Bank of Albania.

BANKS (14) NON-BANK FINANCIALINSTITUTIONS (30)SAVINGS AND LOAN

ASSOCIATIONS (1 UNION AND 13 ASSOCIATIONS)

FOREIGN EXCHANGEBUREAUS (463)

Foreign privatecapital (11)

Domestic private capital (18)

State domesticcapital (2)

Foreign privatecapital (7)

Foreign and domesticprivate capital (3)

Domestic private capital (1 union and 13 associations

Domestic private capital (462)

Foreign and domesticprivate capital (3)

Foreign private capital(1)

22Bank of Albania


investments sh.a. (the absorbing company) • approval of legal re-organisation for the merger by absorption of veneto

Banka sh.a. (the absorbed company) by intesa Sanpaolo Albania sh.a. (the absorbing company);

• revocation of the licence granted to the nBG Bank Albania sh.a. and of the licence granted to veneto Bank sh.a., as a result of their absorption by the American Bank of investments sh.a. and intesa Sanpaolo Bank Albania sh.a., respectively.

• approval to open a subsidiary of Credins Bank sh.a. in the republic of Kosovo;

• approval for union Bank sh.a. to conduct the additional financial activity of trade of securities;

• approval of 59 administrators of banks, including 31 members of steering councils, 13 members of audit committees, and 15 executives;

• approval of the expansion of the banking network with five new branches, within the territory of the republic of Albania;

• approval for select banks to issue subordinated debt and to settle subordinated debt;

• approval of amendments to the statutes of international Commercial Bank sh.a., proCredit Bank sh.a., national Commercial Bank sh.a., Alpha Bank Albania sh.a., the American Bank of investments sh.a.;

• approval for signing of agreements with third parties (outsourcing) and termination on conducting payment and transfer operations, for proCredit Bank sh.a.;

• approval/no-objection on the appointment/re-appointment of chartered auditors for the auditing of financial statements at end of 2018 for all banks.

4.2 non-BAnK FInAncIAL InstItUtIons, MIcRocReDIt FInAncIAL InstItUtIons AnD eLectRonIc MoneY InstItUtIons

the Bank of Albania’s decisions relating to non-bank financial institutions, microcredit financial institutions and electronic money institutions during 2018 included:

• granting a licence to “Financial union tirana”, sh.a., to conduct activity as an electronic money institution. in addition to the issue of electronic money, “Financial union tirana”, sh.a. continues to carry out the payment services and money transfer, foreign exchange, advisory, intermediation and other facilitating activities;

• based on regulatory requirements, following licensing as an electronic money institution, the licence given to the “Financial union of tirana” sh.a., as a non-bank financial institution was revoked;

23 Bank of Albania


• revocation of the licence of “vodafone M-pesa sh.p.k.” electronic money institution license, upon its request;

• preliminary approval for the 100% ownership of capital shares of the non-bank financial institution “Final” sh.a. by the new shareholder “iutecredit Albania” sh.a., which is a microcredit financial institution, licensed by the Bank of Albania;

• preliminary approval for the non-bank financial institution “tirana Factoring & lease” sh.a. to conduct the additional activity of foreign exchange and for “Ak-invest” sh.a. to conduct the additional activities of granting guarantees and taking commitments, of factoring, of providing advisory services, intermediation and other auxiliary activities to those listed in the annex of the licence and intermediation in securities, , and for the electronic money insitution “easypay” sh.p.k to conduct the additional activity of foreign exchange, and advisory activities, and to provide intermediation and other auxiliary services to those listed in the annex of the licence and the activity of intermediation in insurances;

• preliminary approval of the administrators of the nBFis “porsche leasing” sh.p.k., “noA” sh.a., “Kredo Financë” sh.p.k., “Shoqëria e parë Financiare e Zhvillimit – FAF” sh.a., “posta Shqiptare” sh.a., “Micro Credit Albania” sh.a., “MoGo Albania” sh.a., “Final” sh.a., “Albanian Financial institution” sh.p.k., and “omnifactor” sh.p.k.

During 2018, structural changes in the ownership of banks and non-bank financial institutions consisted mainly in changes to the non-qualifying holding of shares or quota of their capital. the Bank of Albania was notified of these changes. these institutions also reported an increase in their paid-in capital.

4.3 FoReIGn excHAnGe BUReAUs

Within the scope of the licensing function, in relation to foreign exchange bureaus, the Bank of Albania decided to:

• license 58 new foreign exchange bureaus.• revoke the licenses of 21 foreign exchange bureaus. revocation in 11

cases was taken due to their inactive status in the commercial register at the national Business Centre, suspension of activity for more than two months and failure to report to the Bank of Albania. the license was revoked for 10 foreign exchange bureaus upon their request due to discontinuation of activity.

4.4 otHeR

As of the end of 2018, banks operated through 447 branches/agencies across the country. the development of information and communication technology as well as a rise in public awareness and education on the use of

24Bank of Albania


banking and financial applications through means of remote communication (smart phones, mobile phones, and websites) have contributed to a downward trend in the number of physical bank branches. these remote communication channels provide and facilitate the use and performance of banking and financial transactions in real time, 24/7, and optimise the expansion of banks’ networks. the legal re-organisation of banks, through merger by absorption during 2018, also contributed to the reduction of physical branches. Following these re-organisations, the absorbing banks have closed a number of overlapping branches.

While bank branches/agencies are present across almost the entire territory of Albania, they are most concentrated in tirana (42.5%), where the population concentration is also greater (31.2%). likewise, the breakdown of the presence of bank branches/agencies by prefectures is also in proportion with the population.

in 2018, the number of applications to conduct foreign exchange activities increased significantly. At the end of 2018, a total of 463 foreign exchange bureaus were operating in the foreign exchange market. During the year, 58 new licences for foreign exchange bureaus were granted, and 21 existing ones were revoked.

in compliance with the requirements laid down in the legal framework in force, nBFis and e-money institutions may conduct the activity of payment and money transfer services and/or funds distribution and repayment. in the case of e-money institutions this may be done even through agents. As of the end of 2018, the number of these entities’ agents was 998. Meanwhile, the Albanian post conducts the activities of payments and transfer of money though post offices across the country.

Chart 2 Number of bank branches/agencies, overyears


524 529534 534 529

499 500493

472

447

400

420

440

460

480

500

520

540

560

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Chart 3 Resident population and bank branches and agencies network, by region in 2018 (in %)

Source: Bank of Albania and INSTAT.

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Berat

Dibër

Durrës

Elbasan

Fier

Gjirokastra

Korça

Kukës

Lezha

Shkodra

Tirana

Vlora

Population in districts (% to total population)Bank branches (% to total number of branches)

Chart 4 Foreign exchange bureaus, over the years


19 3858 58 54 58 60

112

189221

284301

322 333356

397428426

463

-20

0

20

40

60

80

100

120

0

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2000

2001

2002

2003

2004

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2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

No. of FXB (left axis)Change by year in % (right axis)

25 Bank of Albania


Table 2 Number of NBFIs’ agents and number of e-money institutions as at end-2018

AK-inveSt union FinAnCiAr tirAnË eASYpAY pAY AnD

GorAeA FinAnCiAl

ServiCeS totAli

Agents conducting the activity of money transfer on behalf of a nBFi 198 92 10 300

Agents of an e- money institution 368 330 698

totAl 198 368 330 92 10 998Source: Bank of Albania.

in the category of Savings and loan Associations (SlAs), no new licenses were granted in 2018. As at end 2018, there were 13 SlAs and 1 union of SlAs.

26Bank of Albania


5.1 BAnKInG sYsteM HIGHLIGHts

the most important indicator of supervision, the capital adequacy ratio (CAr), has been considerably upward and stable over 2018, reaching around 18.2%, from 17% at the end of 2017. the non-performing loans ratio (nplr) dropped by 2.15 percentage points, to 11.08% at the end of the year, in spite of a 3.36% fall in loans portfolio during the year. profitability indicators, although lower than in 2017, remain at good levels to provide support in capital. roA stood at 1.32% at the end of 2018, from 1.56% at the end of 2017, while roe stood at 12.96%, from 15.71% a year earlier.

the nplr continued to trend downward, in line with the trend recorded in recent years, standing at 11.8% in December 2018, from 13.23% a year earlier. this decrease was due to the 19% fall of npls, affected to almost the same degree by loans write offs and solutions provided by banks to borrowers, including restructuring forms combined with both total and partial payments by the borrowers. At the same time, the credit portfolio dropped by 3.36%, mainly due to depreciation of the exchange rate of foreign currencies against the Albanian lek.

the following are banking system highlights for 2018:1. outstanding credit in the banking decreased by 3.36%, against the

around 0.15% increase in the previous year.2. nplr stood at 11.08%, down by 2.15 percentage points during 2018,

from 13.23% at the end of 2017. the value of npls fell by All 15.14 billion or 3.36%, affected by write offs of All 8.4 billion and by other solutions for loans in collaboration with borrowers.

3. provisioning of npls was high, standing at 65.6%, albeit downward compared to 71.7% a year earlier;3 as a result of this provisioning, net nplr from these provisions was only 3.8% from 4.2% a year earlier;

4. the banking system’s liquidity situation remains satisfactory. the liquidity indicator stood at 46.2%, from 40.79% at the end of 2017;

5. Deposits in the system grew by around All 1.18 billion in 2018, compared to the growth of around All 8.5 billion in 2017;

6. the CAr stood at 18.2% against the regulatory minimum of 12%, showing an annual growth of around 1.65 percentage points;

3 This fall is not a negative development, as it is due to the improvement of non-performing loans structure while the share of loan loss which is 100% provisioned has been down. This development is proportional to net non-performing loans ratio, which has been downward during the year.

5. RIsKs In tHe BAnKInG sYsteM AnD non-BAnK FInAncIAL InstItUtIons

27 Bank of Albania


7. the banking system’s profit was positive in 2018, at All 18.39 billion or All 3.68 billion lower than in 2017. roA and roe were positive, standing at 1.32% and 12.96%, respectively, down from the previous year.

5.2 cAPItAL oWneRsHIP stRUctURe BY coUntRY oF oRIGIn

the shareholders capital of the banking system reached All 147.45 billion, up by around All 0.5 billion, or 0.34% against the previous year. Foreign capital continues to dominate the capital structure, though the presence of the domestic capital increased. At the end of 2018, foreign capital accounted for around 83.46% of paid-in capital in the banking system, considerably down by around 4.92 percentage points from the end of 2017.

5.3 BAnKInG sYsteM stRUctURe

5.3.1 Asset AnD LIABILItY stRUctURe

During 2018, banking system assets grew by around All 7.6 billion or 0.5%, compared to the All 38.04 billion or 2.7% growth of a year earlier. the loan portfolio fell by All 20.2 billion, or 3.4% during this year.

the banking system’s share in the economy, measured by the ratio of total assets to the Gross Domestic product (GDp), remains high. this ratio decreased by 3.15 percentage points this year, standing at 89.35%. Meanwhile, the loan to Gross Domestic product ratio fell due to the growth of GDp against the decrease in the loan portfolio.

Chart 5 Equity ownership structure by country of origin and performanceover time


0.00%

10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

100.00%

1 2 3 4 5 6 7 8

Equity performance over time by country of origin

Turkish Austrian AlbanianItalian Greek FrenchOthers non-EU German Others non-EU

28.03%

18.80%

16.55%

13.31%

11.04%

5.86%

2.31% 2.30%1.80%

Equity structure by country of origin, 2018

Turkish Austrian AlbanianItalian Greek FrenchOthers non-EU German Others EU

28Bank of Albania


Table 3 Banking system total assets and loan portfolio’s share in GDPindicators 2013 2014 2015 2016 2017 2018 total assets (in All billion) 1,234.32 1,293.72 1,318.13 1,407.29 1,445.33 1,452.93 total assets/GDp (in %) 91.13 91.56 91.33 95.05 92.50 89.35 total loans/GDp (in %) 41.88 42.12 40.61 40.55 38.46 35.71


the following provides highlights of the banking system’s asset structure, compared to the same period in the previous year:

• Decrease in treasury and interbank transactions by All 8.62 billion or 1.8%, mainly arising from the decrease in transactions with other banks, credit institutions and other financial institutions by All 12.37 billion or 5.1%, and the decrease in transactions with the Central Bank by All 3.1 billion or 2.1%. Meanwhile, the increase in t-bill transactions by All 1.94 billion or 3% provided a positive impact.

• Decrease of client transactions (net) by All 4.21 billion or by 0.8%.• increase of security transactions (net) by All 18.24 billion (or 5%).• Decrease in other assets by All 7.02 billion or 18.7%.• increase in fixed assets by All 0.18 million or 0.9%.

Table 4 Key banking system asset items

indicators:December 2017 December 2018

Amount* Share** Change %*** Amount* Share** Change %*** 1. treasury and interbank transactions 482.9 34.3 4.4 474.3 32.6 (1.8) of which -transactions with the central bank 149.8 10.6 (3.6) 146.7 10.1 (2.1)- t-bills 65.5 4.7 (4.5) 67.4 4.6 3.0 - transactions with other banks 244.3 17.4 14.5 232.0 16.0 (5.1) 2. transactions with customers (net) 542.7 38.6 2.3 538.5 37.1 (0.8) 3. Security transactions (net) 361.5 25.7 (2.7) 379.7 26.1 5.0 4. other assets 37.6 2.7 17.0 30.6 2.1 (18.7) 5. Fixed assets 19.8 1.4 12.7 20.0 1.4 0.9 total assets 1,445.3 100.0 2.7 1,452.9 100.0 0.5

Source: Bank of Albania.Note: Items 1, 2, 3 in this table include accrued interest.*in ALL billion **in % to total assets***in % to a year earlier

the following provides the banking system’s liability structure highlights, compared to the previous year:

• increase in transactions with customers by All 14.3 billion (1.2%). this increase was mainly arising from the following:

- increase in private sector by All 14.5 billion or 1.3%, - increase in current account by All 0.35 billion or 4.2%;• Decrease in permanent resources by All 8.1 billion or 4.5%;• increase in treasury and interbank transactions by All 2.8 billion, or

3.8%, mainly driven by: - increase in loans by All 4.6 billion or 57.13%; - increase in “central bank” All 4.5 billion or 307.8%; - decrease in treasury bills and other accepted bills, by All 5.2 billion

or 14.3%;

29 Bank of Albania


- decrease of deposits with banks, financial institutions by All 3.6 billion or 17.3%;

• decrease in other liabilities by All 0.77 billion or 5.1%.

Table 5 Key banking system liability items

indicators:December 2017 December 2018

Amount* Share** Change %*** Amount* Share** Change %*** 1. treasury and interbank transactions 76.8 5.3 22.9 79.6 5.5 3.7 2. transactions with customers (gross) 1,165.7 80.7 0.7 1,176.5 81.0 0.9 3. other liabilities 15.0 1.0 14.0 14.3 1.0 (5.1) 4.permanent resources 179.4 12.4 7.0 170.9 11.8 (4.7) total liabilities 1,445.3 100.0 2.7 1,452.9 100.0 0.5

Source: Bank of Albania.*in ALL billion **in % to total liabilities***in % to a year earlier

During 2018, the share of off-balance sheet items in total assets fell to 112.7%, from 113.8% at the end-2017. table 6 shows that the annual fall during this year was driven by the fall in “commitments granted”. the commitments received and foreign currency transactions grew by All 16.1 billion and All 4.1 billion, respectively. Meanwhile, other items were down. the commitments received have the main share in off-balance sheet items, accounting for 85.6%, from 84.5% at the end of 2017.

Table 6 Change in off-balance sheet items compared to the previous year

indicators:

Change from previous year

December

17

Change from previousyear

December

18December 17 December18in All bln in % in All bln in %

totAl 78.4 5.0 1,645.2 (8.5) (0.5) 1,636.8 Commitments granted 15.3 8.2 202.3 (19.4) (9.6) 182.9of which: 0.0 - Financing commitments (4.0) (6.9) 54.4 (0.9) (1.7) 53.4- Guarantees 5.7 13.7 47.1 (6.1) (13.0) 40.9- Security committments 13.7 15.7 100.8 (12.3) (12.2) 88.5

Commitments received 65.0 4.9 1,390.0 10.4 0.7 1,400.4of which: 0.0 - Financing commitments -3.9 (25.6) 11.3 -5.0 -44.2 6.3- Guarantees 69.1 5.3 1,377.8 16.1 1.2 1,394.0Foreign currency transactions -8.3 -19.0 35.4 4.1 11.7 39.6other commitments -0.7 -7.4 9.2 -7.3 -80.0 1.8Commitments forfinancial instruments 7.1 611.2 8.3 3.8 45.2 12.0


5.3.2 concentRAtIon

Concentration, as measured by the Herfindahl index calculated for total deposits and loans, registered the same level as in 2017, while assets showed a slight increase. All three indicators show low and stable levels over the years.

30Bank of Albania


Table 7 Herfindahl* (H) Index of asset, deposit and loan concentrationindicators 2015 2016 2017 2018 index H (assets) 0.15 0.15 0.15 0.16 index H (deposits) 0.15 0.14 0.15 0.15 index H (loans) 0.12 0.13 0.13 0.13

Source: Bank of Albania.*The values of this indicator fluctuate between 0 and 1. Values closer to 0 show low levels of

concentration.

5.4 MAnAGeMent oF BAnKInG ActIVItY RIsKs

5.4.1 cReDIt RIsK

5.4.1.1 Lending

total credit fell by All 20.18 billion or about 3.36% during 2018, unlike the previous year when this portfolio was up by around All 0.5 billion. this performance was mainly determined by developments in the exchange rate. As a result of depreciation of both the euro and the uS dollar, by 7.16% and 2.95%, respectively, against the Albanian lek, the credit portfolio, converted into lek, fell by around All 22.94 billion. in the absence of these developments the credit portfolio would have grown by around All 2.76 billion.

During 2018, the credit portfolio increased only in Q3. the highest fall was reported in Q2 by All 14.17 billion.

Table 8 Quarterly credit growth in 2018Quarterly credit growth Quarter i Quarter ii Quarter iii Quarter iv in All million (4,409.10) (14,170.28) 4,026.91 (5,636.15) in % (0.73) (2.38) 0.69 (0.96)


over eight months of 2018, the monthly performance of credit was down, where the highest fall was reported in May, December and June by All 6.8 billion (1.2%), All 4.6 billion (0.8%) and All 4.1 billion (0.7%), respectively. this portfolio also fell considerably in March and April. in the other months of the year the credit portfolio increased, notably in September, July and november by All 1.94 billion (0.33%), All 1.51 billion (0.26%) and All 1.1 billion (0.19%), respectively. the monthly average credit fall stood at 0.28% for 2018.

the analysis of credit by type of entity shows a

higher concentration in the private sector, around 63.4%, down by 1.6 percentage points, while credit to this sector, during 2018, decreased by

Chart 6 Monthly credit growth in 2018 (in %)


-0.28%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

January 2018

February 2018

March 2018

April 2018

May 2018

June 2018

July 2018

August 2018

September 2018

October 2018

Novem

ber 2018

Decem

ber 2018

Monthly credit performanceMonthly average growth

31 Bank of Albania


All 22.39 billion (5.7%). the share of credit to the public sector also fell by 0.6 percentage point, while credit to this sector decreased by All 4.51 billion (13.9%). Credit to households grew by All 6.72 billion (3.8%), or 2.2 percentage points higher.

the share of loans in the domestic currency was up approximately by 0.37 percentage point, standing at 43.93%. Within the credit portfolio in foreign currency, euro loans accounted for around 90.29%, from 90.46% in 2017, while u.S. Dollar loans accounted for around 9.66%, from 9.48% of the portfolio.

By entity and purpose of use4 the analysis shows that loans for “investment for real estate” to households have the major share in the total credit portfolio (21.4%); followed by “overdraft” to enterprises (21.1%); loans for “equipment purchase” to enterprises (18.5%); and loans for “investment in real estate” to enterprises (15.6%).

in 2018, loans for “consumption of non-durable goods” reflects the highest growth, followed by loans for “consumption of durable goods” to households, by 12% and 4%, respectively. “overdraft” and loans for “working capital” to enterprises showed the highest fall by 12.3% and 12%, respectively.

Table 9 Credit by sector and purpose of use (in ALL billion and share of each to total loans) DeSCription December 2017 Share in %

Change in % December 2016 - December 2017

December 2018 Share in %

Change in % December 2017 - December 2018

total loans 533.8 100.0 0.6 504.3 100.0 (5.5)

Credit to enterprises 362.3 68.4 (2.2) 329.2 65.3 (9.1)

overdraft 123.6 23.3 5.1 108.5 21.5 (12.2)

Working capital 51.6 9.7 (16.4) 45.7 9.1 (11.5)

equipment purchase 6.9 1.3 17.2 94.7 18.8 1,267.0

real estate investments 97.8 18.5 (2.4) 80.3 15.9 (17.9)

other loans 82.3 15.5 (2.8) - - -

Credit to households 171.5 32.4 6.9 175.1 34.7 2.1

overdraft 8.4 1.6 5.3 7.6 1.5 (9.0)

non-durable goods 24.7 4.7 16.7 27.8 5.5 12.5

Durable goods 18.9 3.6 7.9 19.6 3.9 3.9

real estate loans 106.5 20.1 2.5 110 21.8 3.3

loans for other purposes 13.1 2.5 31.4 10.1 2.0 (22.7)Source: Bank of Albania.Note: Data in the table refer only to resident customers and do not include accrued interests.

4 Data do not include non-residents.

Chart 7 Outstanding credit to enterprises andhouseholds, in % to total credit


25.0%

26.0%

27.0%

28.0%

29.0%

30.0%

31.0%

32.0%

33.0%

60.0%

62.0%

64.0%

66.0%

68.0%

70.0%

72.0%

Decem

ber`12M

arch`13June`13Septem

ber`13D

ecember`13

March`14

June`14Septem

ber`14D

ecember`14

March`15

June`15Septem

ber`15D

ecember`15

March 2016

June 2016Septem

ber 2016D

ecember 2016

March 2017

June 2017Septem

ber 2017D

ecember 2017

March 2018

June 2018Septem

ber 2018D

ecember 2018

Credit to enterprises (left)Credit to households (right)

32Bank of Albania


the structure of loans by term to maturity has changed, from the previous year, showing a fall in the share of short and medium-term loans in favour of long-term loans. As at the end of 2018, the latter have the major share in the total loan portfolio, followed by short and medium-term loans.

Table 10 Structure of outstanding credit by term to maturity (in %)term to maturity December 2016 December 2017 March 2018 June 2018 September 2018 December 2018Short-term 33.1 30.6 30.1 29.0 28.4 28.1 Medium-term 44.4 18.7 18.4 18.8 19.2 19.6 long-term 22.5 50.7 51.5 52.2 52.4 52.3


in 2018, the credit portfolio by currency shows that foreign currency loans continue to have the highest share in total loans by 56.1%, though the trend has shifted from foreign currency loans to domestic currency loans. At the end of 2018, the share of loans in domestic currency to total credit portfolio increased by 0.4 percentage point, compared to the same period in the previous year.

Table 11 Structure of outstanding credit by currency (in %)Currency December 2016 March 2017 June 2017 September 2017 December 2017 December 2018lek 41.4 41.6 42.9 42.9 43.6 43.9Foreign currency 58.6 58.5 57.1 57.1 56.4 56.1


in 2018, the share of foreign currency loans unhedged against the exchange rate risk to total credit in foreign currency5, compared to the previous year, increased by 0.7 percentage point, standing at 44.2%.

5 The credit unhedged against the exchange rate risk is defined in Bank of Albania’s Regulation, No. 62, dated 14.09.2011 “On credit risk management”, Article 4, paragraph 2 (c).

0

100

200

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Decem

ber`13M

arch`14June`14Septem

ber`14D

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ber`15D

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ber 2016D

ecember 2016

March 2017

Qershor 2017

September 2017

Decem

ber 2017M

arch 2018June 2018Septem

ber 2018D

ecember 2018

FX outstanding creditALL outstanding creditTotal outstanding credit

Chart 8 Volume of outstanding credit by currency (inALL billion)


Chart 9 FX credit unhedgedagainst exchange rate risk in FX credit portfolio (in %)


20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

Q4 `14

Q1 `15

Q3 `15

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Q2 `16

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Q4 `16

Q1 `17

Q2 `17

Q3 `17

Q4 `17

Q1 `18

Q2 `18

Q3 `18

Q4 `18

FX credit unhedged against the exchange rate risk (in %)

33 Bank of Albania


the structure of credit by sectors of the economy6 for 2018 does not show considerable changes on a year earlier. “Wholesale and retail trade” and “repair of vehicles and motorcycles” remain the most credited sectors of the economy, sharing 37% in the portfolio, followed by “processing industry” and “Construction” sharing 15.5% and 15% in the portfolio, respectively.

Table 12 Credit by branches of economy (in % to total credit)

DescriptionDecember 2017 December 2018Amount Share in % Amount Share in %

enterprises 364.3 68.6 317.7 63.2Agriculture, Forestry, Fishing 5.4 1.0 4.8 1.5extracting industry 7.7 1.5 8.1 2.6processing industry 54.1 10.2 49.1 15.5electricity, gas supply, steam and air conditioning 52.7 9.9 15.9 5.0Water supply, waste management activities 0.2 0.0 0.2 0.1Construction 46.4 8.7 47.8 15.0Wholesale and retail trade; repair of vehicles and motorcycles 119.8 22.6 117.7 37.0transportation and storage 7.8 1.5 6.7 2.1Accommodation and food services 13.6 2.6 13.3 4.2information and communication 3.9 0.7 2.7 0.8Financial and insurance activities 2.8 0.5 2.9 0.9real estate activities 4.2 0.8 5.4 1.7professional, scientific and technical activities 0.8 0.2 1.0 0.3Management and supporting services 0.4 0.1 0.7 0.2public management and defence; obligatory social security 1.7 0.3 1.0 0.3education 5.7 1.1 5.5 1.7Healthcare and social work activities 3.8 0.7 4.0 1.3Art, recreation and relaxation 3.0 0.6 2.3 0.7other service activities 28.1 5.3 27.1 8.5Households’ activities as employers; Activities of output of invariable goods and services of households for their own use 2.1 0.4 1.3 0.4

Activities of international organisations and bodies 0.2 0.0 0.2 0.0Households 169.5 31.9 184.7 36.8total 533.8 100.0 502.4 100.0Note: Data in the table refer only to resident customers and do not include accrued interests.Source: Bank of Albania

5.1.1.1 Credit quality

As at the end of 2018, non-performing loans stood at All 64.36 billion, down by All 15.14 billion, or 19% compared with the previous year. the ratio of non-performing loans declined by 2.15 percentage points in annual terms, standing at 11.08% at the end of 2018.

6 Data do not include non-residents.

Chart 10 NPLs and credit portfolio compared to the previous quarter (in %)


-13%

-9%

-5%

-1%

3%

7%

11%

15%

19%

Sept.'11D

ec.'11M

arch' 12Junbe'12Sept.'12D

ec.'12M

arch' 13June'13Sept'13D

ec.'13M

arch' 14June'14Sept.'14D

ec.'14M


ec.'15M


ec.'16M


ec.'17M


ec.'18

Non-performing loans growthOutstanding credit growth

34Bank of Albania


the level of npl provisioning is high and net outstanding non-performing loans to total loan portfolio stood at 3.81%, slightly up by 0.07 percentage point from December 2017.

the portfolio of performing loans shows that “standard” loans grew by 1.66 percentage points, while “special-mention” loans fell by 4.16 percentage points. Meanwhile, the npl portfolio shows a decrease in “substandard”, and “lost” loans by 0.07 percentage point and 2.38 p.p., respectively. the category of “doubtful” loans was up by 0.31 percentage point.

Table 13 Share of outstanding credit by category (in %)

Classification2017 2018

Q i Q ii Q iii Q iv Q i Q ii Q iii Q ivStandard loans 77.6 74.3 77.0 78.1 72.7 74.2 77.9 79.7 Special mention loans 5.0 10.2 8.2 8.7 9.0 7.8 4.8 4.5 Sub-standard 4.6 4.0 3.4 3.3 3.6 3.7 3.5 3.2 Doubtful loans 2.3 2.2 2.5 2.2 2.6 3.0 3.3 2.6 loss loans 10.6 9.3 8.8 7.7 7.2 6.6 6.1 5.3


loan loss provisions amounted to All 42.23 billion, down by around All 14.77 billion from the previous year. Also, the “loan loss provisions to non-performing loans” was 65.62%, around 6 percentage points lower.

the share of net npls to regulatory capital fell by 7.85 percentage points compared to the previous year, showing an increase in the system’s capability to cover with capital the losses that may rise from loan deterioration. this indicator improved mainly due to the high decrease of npls in relation to regulatory capital.

Chart 11 Outstanding NPLs in the banking system


2.0%

6.0%

10.0%

14.0%

18.0%

22.0%

26.0%

-

20,000

40,000

60,000

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100,000

120,000

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160,000

Dec.'13

March' 14

June'14Sept.'14D

ec.'14M


ec.'15M


ec.'16M


ec.'17M


ec.'18

Outstanding non-performing loans (ALL million, left)Non-performing loans/Outstanding credit (right)

Chart 12 Loan loss provisions


50.0%

54.0%

58.0%

62.0%

66.0%

70.0%

74.0%

-

20,000

40,000

60,000

80,000

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160,000

Dec.'11

March'12

June'12Sept.'12D

ec.'12M

arch’13June'13Sept.'13D

ec.'13M

arch'14June'14Sept.'14D

ec.'14M


ec.'15M


hjet'16M


ec.'17M


ec.' 18

(1) NPL provisions (in ALL million, left)(2) Non-performing loans (gross) (in ALL million, left)Ratio (1)/(2) (in %, right)

35 Bank of Albania


regarding the credit quality by type of borrower, the nplr for enterprises decreased by 2.3 %, standing at 13.3%, while for households it decreased by 1.2 percentage points compared to the previous year, standing at 6.4%.

By currency, the npl ratio in lek was lower, at 8.5% (11.3% at the end of the previous year), compared with foreign currency npls by 13.1% (14.7% at the end of the previous year).

Within the portfolio of unhedged foreign currency loans against the exchange rate risk, unhedged npls against the exchange rate risk accounted for 11% or 1 percentage point lower than in December 2017. the foreign currency npls, unhedged against the exchange rate risk, stood at 30.6%, down by 3.1 percentage points from the end of 2017. this decrease was attributable to

Chart13 Net NPLs to regulatory capital ratio


0%

10%

20%

30%

40%

50%

60%

70%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Dec.`10

March`11

June`11Sept.`11D

ec.`11M

arch`12June`12Sept.`12D

ec.`12M


ec.`13M


ec.`14M


ec.`15M


ec.`16M


ec.`17M

arch' 18June'18Sept.18D

ec.`18Net non-performing loansRegulatory capitalNet non-performing loans / Regulatory capital

Chart 14 Outstanding NPLs to enterprises andhouseholds


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

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20,000

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120,000

Dec.'12

March'13

June'13Sept.'13D

ec.'13M


ec.'14M


ec.'15M


ec.'16M


ec.'17M


ec.'18

Enterprises NPLs (in ALL million), leftHouseholds NPLs (in ALL million), leftEnterprises NPLs/Enterprises loans, rightHouseholds NPLs/Households loans, right

Chart 15 Outstanding NPLs by currency


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

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100,000D

ec.'12M


ec.'13M


ec.'14M


ec.'15M


ec.'16M


ec.'17M


ec.'18

ALL Outstanding NPLs (in ALL million)FX Outstanding NPLs (in ALL million)ALL NPLs/total ALL loans (right)FX NPLs/total FX loans (right)

Chart 16 Quarterly unhedged foreign currency NPLs to unhedged foreign currency outstanding credit


0%

5%

10%

15%

20%

25%

020,00040,00060,00080,000

100,000120,000140,000160,000180,000

March' 16

June'16

Sept.'16

Dec.'16

March' 17

June'17

Sept.'17

Dec.'17

March' 18

June'18

Sept.'18

Dec.'18

Outstanding FX NPLs unhedged against the exchange rate risk

FX NPLs unhedged against the exchange rate risk

FX NPLs unhedged against the exchange rate risk/Outstanding FX NPLs unhedged against the exchange rate risk

36Bank of Albania


the decrease of foreign currency npls by 17.1% and the decrease of foreign currency unhedged outstanding credit against the exchange risk by 23.3%.

the major share of the loan portfolio (78.2%) was collateralized, up by 1.45 percentage points from a year earlier. By type of collateral, the largest share of loans in the system, around 53%, was collateralized by real estate. loans to households had a higher rate of collateralization with real estate, at 63%, compared to loans to enterprises, at 48 %.

Table 14 Type of collateral by sector and currency (in %)

type of collateralHouseholds enterprises total

All Foreign currency All Foreign currency All Foreign currencyreal estate 56% 72% 43% 52% 48% 56%Cash 3% 3% 2% 4% 3% 4%other collateral 5% 9% 42% 22% 26% 19%uncollateralized loan 36% 15% 13% 23% 23% 21%total 100% 100% 100% 100% 100% 100%


the Bank of Albania conducts stress tests to measure a bank’s capital resilience to risks facing the banking activity. Analyses show that the current level of the banking system capital is sufficient to withstand a relatively high level of losses, which may arise from exposure to credit risk. this ability of the capital to withstand any potential losses was constant throughout 2018.

5.4.2 LIqUIDItY RIsK

in 2018, the overall liquidity situation in the banking system continued to be stable, showing a relatively low exposure to liquidity risk. Steady growth of deposits, as the main financing contributor to banks’ activity, a level of liquidity two times higher than the regulatory minimum (calculated as a ratio of liquid assets to short-term liabilities), a low credit to deposits ratio and the ability of the system to generate liquidity in the event of materialisation of extraordinary situations, all provide an adequate framework for protection against liquidity risk.

liquidity indicators continuously appear significantly above the regulatory requirement set out in the Bank of Albania’s regulatory acts. in December 2018, the ratio of liquid assets to short-term liabilities in the banking system was 46.2%7, up by 5.42 percentage points from the previous year, mainly as a result of liquid assets’ growth by 13.87%. the main increase in liquid assets is mainly attributable to investments in “Deposits and current accounts with banks and other financial institutions”, followed by investments in “securities of the Albanian Government” and investments in “tradable securities/ placement issued by central governments classified by international credit rating agencies at the equivalent S&p classification, not less than A+”. 7 The minimum required level for this indicator, as laid down by the regulatory requirements, is

20%.

37 Bank of Albania


in December 2018, the liquidity in foreign currency, stood at 36.8%8 (from 32.1% in December 2017), owing to the higher increase of liquid assets in foreign currency against the decrease of short-term liabilities. the largest increase in liquid assets in foreign currency is due to the channelling of funds to “deposits with a residual term to maturity of up to 7 days, and the current accounts with banks or financial institutions” and the increase of investments in “tradable securities/placement issued by central governments classified by international rating agencies equivalent to S&p classification, not less than A+”. liquid assets in lek remain the main support of liquidity at 56% of total liquid assets (57% of the total liquid assets in December 2017) and the level of the indicator in lek stood at 57.8% in December 2018 (51.3% in December 2017).

5.4.2.1 Banking system deposits9

Customer deposits remain the main source of financing for the Albanian banking system, sharing 81.23% (80.40% December 2017) of total liabilities. in December 2018, the total value of deposits in the system amounted to All 1.180 billion, recording 1.25% annual growth from the previous year. the share of the domestic currency in total deposits fell slightly to 46.87%, from 47.08% in December 2017. the maturity structure shifted to short-term maturities, given that the share of current accounts and demand deposits increased, whereas time deposits shrank relatively, driven by the continuous downward interest rates in the market.

5.4.2.2 Concentration of deposits

in December 2018, the ten largest depositors accounted for 5.30% of the banking system’s total deposits, from 5.46% in December 2017. the other groups of larger depositors show a similar contracting performance.

Households’ deposits remain the main base of the banking system’s deposits, with a share of 82.81% of total deposits, down by around 0.43 percentage points, compared to the previous year. Households’ accounts grew faster than enterprises’ accounts (0.59% and 0.15%, respectively) during 2018.

5.4.2.3 Loan to deposit ratio

the loan to deposit ratio in December 2018 was 49.2% (51.55% in December 2017) and reflects a structure of asset-liabilities that facilitates liquidity management and provides potential lending incentives. During 2018,

8 The minimum required level for this indicator in the Albanian lek and foreign currency, as laid down by the regulatory requirements, is 15% and 20%, respectively.

9 “Deposits” refers to all sources from clients, including current accounts, time deposits, demand deposits and other accounts, except when otherwise specified.

38Bank of Albania


the ratio reduced slightly due to the different growth rates of credit portfolio and total deposits (credit portfolio fell, while deposits grew). this ratio has always shown higher values in the foreign currency segment, albeit there was a fall in the ratio during 2018, from 51.92% to 57.6%, under the impact of the above-stated factors, for the ratio in total.

5.4.2.4 Liquid assets of the banking system

During 2018, liquid assets grew by All 60.6 billion, or 13.87%. mainly as a result of the investment portfolio of banks in securities of the Albanian Government and the channelling of funds in deposits and current accounts with banks or other financial institutions.

total liquid assets of the banking system amounted to All 497.3 billion, in December 2018. Government securities have the main share in their structure (by 50.33%, from 51.18% in December 2017).

5.4.2.5 Other financial sources

other financial sources in the banking system have a relatively low share in total assets, about 5.48%, expanding slightly during the year (5.31% in December 2017). liabilities to financial institutions and repurchasing agreements had the main share in this item.

5.4.2.6 Stress tests

Stress tests, which assume various scenarios of unpredictable events and factors that may have a negative impact on liquidity, have shown that all banks may successfully withstand such situations.

5.4.3 MARKet RIsKs

the overall state of the banking system’s exposure to market risks remained at low levels over 2018. For the assessment of market risks, the trading book and the banking book include indicators (risk factors) of exposure to: change of interest rate in the banking book; exchange rate risk in all the balance sheet items; the position risk (specifically change of interest rate in the tradable and placement portfolio); and the capital buffers to cover potential losses from these risks.

the capital requirement for market risk at system level constitutes only 1.51% of the total capital requirement. this exposure arises mainly from the exchange rate risk as the trading portfolio is at very low levels.

39 Bank of Albania


Market risk originating from the exposure to interest rate risk - measured as the change of exposure value in the banking book after the standard shock in the interest rate to regulatory capital - stood at stable levels during the year, reflecting a balanced structure of re-priced assets and liabilities in the banking system. in December 2018, the value of this indicator was 6.59%, fro

bank of albania · 2019. 7. 4. · bank of albania 2 2018 annual supervision report data from this...

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